Risk is good, as long as you know the odds

I’m shutting down Private Trader for awhile. The time taken for posting can be put to better use for research.

To anyone wishing information on how to trade options the way I do, I strongly recommend checking out TastyTrade, which I consider to be the best options education site on the internet.

For any wishing information on Elliott wave analysis, which I also use for some trades, I strongly recommend checking out Elliott Wave International, the best source of information for those who wish to learn this useful method of understanding charts.

The tech giants of the Silicon Valley are the bread and butter of trading today. Yet they were once startups, the risky private companies backed by risk-taking private funds hoping to make it big. And so the cycle goes. A few of today’s risky startups will be tomorrows tech giants, the bread and butter of future trading, but most will stumble and fall aside on the complex path from a small beginning to outsized success.

John Carreyrou, an investigative reporter with The Wall Street Journal, takes us inside one of the most spectacular stumbles in recent years of a Silicon Valley startup. Theranos Inc. was started in Palo Alto, California with the goal of revolutionizing that most mundane of medical experiences, the blood test.

The company was valued in 2013 at more than $10 billion, and its CEO, Elizabeth Holmes, was talked about as the new Steve Jobs, but after Carreyrou, writing in The Wall Street Journal, questioned the technology, the company under pressure from medical authorities and the federal regulators quickly fell into decline and was close to bankruptcy.

In this book Carreyrou reveals the hard truths behind the dreams. Bad Blood is currently ranked #28 in Business & Money books, and #19 in that section for Kindle eBooks.

Fed Gov. Lael Brainard takes to the podium on Tuesday at 10 a.m. to discuss artificial intelligence and finance at a conference held by the Federal Reserve Bank in Philadelphia.

Fed Vice Chairman for Supervision Randal Quarles will testify before Congress about financial regulation. He’ll talk to the House Financial Services Committeeon Wednesday and the Senate Banking Committee on Thursday, each day at 10 a.m. The twin appearances are semiannual events.

I have entered a short iron fly spread on HD, using options that trade for the last time 42 days hence, on Dec. 21. The premium is a $9.26 credit per contract/share and the stock at the time of entry was priced at $185.72 per share.

I entered the trade to coincide with an earnings announcement on Tuesday, Nov. 13, before the opening bell.

The profit zone for this position is between $194.26 on the upside and $179.26 on the downside.

That’s a wrap for the week. I shall my discussion of economic reporting, The Week Ahead, on Saturday.

3:05 p.m. New York time

HD‘s implied volatility rank rose a bit, to 49%, and so I fudged my normal 50% or greater rule and entered the trade, for an excellent risk/reward ratio.

9:50 a.m. New York time

My single potential earnings play for Friday is HD. It has a high market capitalization, but its implied volatility rank is low, in the 4th quintile at 44%. With the IV rate under 50%, I’m not interested and plan no analysis or trade.

This 1989 book is still on the best-seller list. And no wonder. The author, Michael Lewis, has a knack for diving past the nonsensical facades to the heart of the matter, be it bonds or baseball. In the case of Liar’s Poker, it’s the inside story of selling bonds — Lewis’ first step in the journey from bond salesman to best-selling author. When I first read it, it was a book that I couldn’t put down.

Since then, he has brought his perspective to a boat-load of Lewis’ latest book, The Fifth Risk, takes on the operations of government. It came out in early October and now stands at the top of the Economics and Public Affairs categories on Amazon.

I have entered a short iron fly spread on ATVI, using options that trade for the last time 43 days hence, on Dec. 21. The premium is a $6.16 credit and the stock at the time of entry was priced at $63.01.

I entered the trade to coincide with an earnings announcement today, Nov. 8, after the closing bell.

The profit zone for this position is between !$ on the upside and !$ on the downside.

I have exited UPS for a profit and shall update the analysis with results.

9:50 a.m. New York time

I’m looking at two prospective earning plays today. ATVI has the highest IV rank, in the 1st quintile (81-100), but comes in second in market capitalization. DIS has an IV rank in the 2nd quintile (61-80) and has the higher market cap. I’ll choose later in the day.

I have two exits planned: EWZ and PM, which expire next week. UPS — a Dec. 21 expiration — is around 25% of maximum potential profit, and I shall exit if I can get a fill.

True confession: I live on the West Coast of the United States, and the opening bell of the markets rings in my ears at 6:30 in the morning. When I haven’t prepped the day before, I end up with 5 a.m. days.

Performance expert Robin Sharma in this book describes his morning routine designed to produce health and serenity.

As a trader, health and serenity describe my greatest needs, after profit. Sharma says he has answer to those needs.

I have entered a short iron fly spread on QCOM, using options that trade for the last time 44 days hence, on Dec. 21. The premium is a $4.44 credit and the stock at the time of entry was priced at $62.61.

I entered the trade because it coincides with an earnings announcement today, Nov. 7, after the closing bell.

The profit zone for this position is between $66.94 on the upside and $59.44 on the downside.

by Wolfgang H. Hammes

Preternaturally low inflation has been with us for a decade, and memories are fading of the long years of rapidly rising, sometimes runaway, prices.. As the Federal Reserve raises interest rates in defense against inflation, many voices can be heard muttering, “Inflation? What’s to worry? Don’t bring back the recession.”. Hammes argues that the risk of inflation is real, and in this well researched book provides a map of the world we’ll be trading in when (not if) inflation once again returns.

I’m looking at several prospective earnings plays today. It’s a choice from a fairly poor group. More on that later, but first, a change in my exit rules that may make it necessary to loosen by rules on acceptable trades.

I’m look at the five top-quintile prospects for earnings plays, using these criteria: 1) The higher the implied volatility rank, the better; 2) the higher the market capitalization, the better; 3) a chart running contrary to the S&P 500, i.e., above the 12-month moving average is better than below.

DVN and KORS are the leaders for criteria one and two, but they fail on criteria three. The next one down, ETSY, meets all three criteria, although with a market cap of $5 billion, it’s not as high as I like. I’m going to give in to my inclination pass on it, preserving funds for larger companies announcing later.

A exit order on GILD was filled moments ago. It’s somewhat under my normal management point, 25% of maximum profit, but since I expect a sharp market decline, best in my mind to take the profit and run.

I have eight possible earnings plays on my desk this morning, with five having top quintile implied volatility ranks.

I haven’t made decisions yet. The most liquid have market caps in the 10s of billions of dollars rather than the hundreds of billions, which is a drawback.

Nate Silver got his start predicting sports, moved on to competitive poker and finally became a nationally recognized name when he applied his considerable skills to the predicting elections.

Today is election day in the United States, so what better time to open Silver’s 2012 book on statistics and prediction? I found the book to be fascinating the first time I read it, and even more so the second time.

I’m a trader, and part of my living comes from my ability to understand statistics and to predict what the market will do within the confines of those numbers. Although not focused specifically on the markets, this book provides an excellent gateway to Silver’s methods, and for me, part of the attraction has been to try to link in my own mind his techniques of analyzing sports and politics and my techniques for assessing trades.

A good read that has been useful in focusing my mind on the statistical aspect of trading. I highly recommend it.

I have no earnings plays that I care to take from today’s seven prospects. I’m looking for stocks with market caps above $100 billion (although I’ll fudge that figure) and implied volatility ranks in the 1st quintile (81-100). None of the seven fulfills both requirements, and so I shall reject them all.

The prospects are:

1st quintile (81-100): OAS, GLUU and HL

2nd quintile: CVS and LLY

3rd quintile: AES and ATRS

LLY is the sole prospect with a qualifying market cap, and its IV rank is in the 70s.

This 2012 best-seller contains a great truth that is important to traders like us. Trading is psychology. How you think determines what trades you make. If a trader treats the markets as a rational machine, to be understood in detail, then you will tend toward a certain sort of analysis — perhaps looking at the underlying business and finances of a company. That would be Daniel Kahneman’s slow thinking. If we rely on intuition, on the feel of of a trade, our analysis will look quite different — perhaps the patterns on a chart that engage our marvelous human pattern recognition systems. The ancient Greeks lived by the aphorism, “Know yourself”. Traders today will profit if they live by those words as well.

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